Exit and Growth Strategies for Middle Market Businesses

This blog post is the third in a series of 5.

Business owners inquiring whether the timing is optimal for obtaining the highest price for their business, often start by inquiring: “What are business valuations in the market today?” EBITDA multiples provide a quick thumbnail answer to this question.

However, just focusing on today’s industry numbers, does not enable a business owner to evaluate the risk of whether the business will be worth more or less in the future, as compared to selling the business now.

Savvy business owners, who are attuned to macro factors impacting business valuations, such as the aging population, financing terms and tax reasons, understand that several conditions exist today, which support selling your business in 2014. In addition to these macro factors, the question of timing comes down to whether selling the business is strategically beneficial for the business, given its life-stage, as well as compelling personal reasons why it makes good sense for the business owner to sell.

3. Further Potential Capital Gains Tax Increases

In 2013, Congress passed the American Taxpayer Relief Act (ATRA), raising the capital gains tax from 15% to 20% for taxpayers in the 39.6% marginal income tax bracket, (individuals earning more than $400K, and married couples earning more than S450K, annually). Above and beyond that capital gains tax rate, high-income earners are subject to a net investment income tax of 3.8%, as well as applicable state income taxes.

To address the nation’s current and growing national debt, the Obama administration is a major proponent for raising capital gains taxes in excess of 28% for higher income earners. In 2014, the political lawmakers will be seeking to reach agreements on many of the key elements in the tax code, then the capital gains tax increases implemented in 2015 and 2016.

For Sellers, the potential for increases in the capital gains tax, significantly increases the probability that Sellers will receive less net profits from selling the business. Given that capital gains rates mid-1990s, were 28%, a real risk exists that capital gains rates could return to this level or higher. Thus, an impetus exists to sell in 2014.

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